Taxation
(Hong Kong)
Tuesday 4 December 2012
Time allowed
Reading and planning:
Writing:
15 minutes
3 hours
ALL FIVE questions are compulsory and MUST be attempted.
Tax rates and allowances are on page 2.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants
Paper F6 (HKG)
Fundamentals Level – Skills Module
SUPPLEMENTARY INSTRUCTIONS
1.
2.
3.
Calculations and workings should be rounded down to the nearest HK$.
Apportionments need only be made to the nearest month, unless the law and prevailing practice require otherwise.
All workings should be shown.
TAX RATES AND ALLOWANCES
The following 2011/12 tax rates and allowances are to be used in answering the questions.
Allowances
Basic allowance
Married person’s allowance
Single parent allowance
Child allowance – 1st to 9th child (each)
Child allowance – additional allowance in the year of birth (each)
Dependent parent/grandparent allowance – basic
Dependent parent/grandparent allowance – additional
Dependent brother/sister allowance
Disabled dependant allowance
$
108,000
216,000
108,000
60,000
60,000
18,000/36,000
18,000/36,000
30,000
60,000
Deductions
$
60,000
100,000
72,000
12,000
Self-education expenses (maximum)
Home loan interest (maximum)
Elderly residential care expenses (maximum)
Mandatory provident fund contributions (maximum)
Tax rates
Salaries tax rates:
First $40,000
Next $40,000
Next $40,000
Remainder
2%
7%
12%
17%
Standard rate
15%
Profits tax rate for corporations
16·5%
Depreciation allowance rates
Initial allowance:
Plant and machinery
Industrial buildings
60%
20%
Annual allowance:
Computers
Motor cars
Furniture and fixtures
Machines
Industrial buildings
Commercial buildings
30%
30%
20%
10%–30%
4% or formula
4% or formula
2
This is a blank page.
Question 1 begins on page 4.
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[P.T.O.
ALL FIVE questions are compulsory and MUST be attempted
1
Sammy is employed by First Ltd (the Company), a company resident in Hong Kong, as project manager in charge of
the Company’s construction project in Macau. He commenced this employment in April 2010. The following
information is available in respect of Sammy for the year ended 31 March 2012:
(1)
His salary was $70,000 per month.
(2)
Sammy returns to Hong Kong every Saturday afternoon to stay with his family and goes back to Macau on
Monday morning. He also comes back to Hong Kong during his vacations. During the two years ended
31 March 2011 and 2012, Sammy was in Hong Kong for a total of 200 days and 190 days respectively.
Because of the nature of his duties, he was rarely required to perform any duties in Hong Kong, except to attend
meetings in Hong Kong whenever necessary.
(3)
Sammy received fees of $30,000 from overseas companies which have supplied construction materials to the
Company, which was approved by the Company.
(4)
Remuneration for Sammy’s services rendered in Macau is subject to income tax in Macau, and Sammy was
required to pay $80,000 to the Macau tax authority. However, Sammy did not pay the tax.
(5)
Sammy was provided with a flat in Macau, and meals were provided for him at the construction site at a cost
to the Company of $1,000 per month. On 1 March 2012, he purchased the flat from the Company for
$800,000. The market value of the flat at that date was $900,000. The flat continued to be the residence of
Sammy during his stay in Macau. The cost of his travelling expenses between Hong Kong and Macau of $2,000
per month were paid directly by the Company.
(6)
In September 2011, Sammy was hurt in an accident while working on the construction site. The Company
reimbursed Sammy’s medical expenses of $28,000 that he paid for his stay in the hospital in Macau. In
addition, he was paid $80,000 by the Company for the loss of the little finger on his left hand.
(7)
Sammy is entitled to a discretionary bonus, which is normally one month’s salary plus a top-up which is
determined based on the Company’s profitability during the captioned year. During 2011/12, Sammy was paid
the following amounts:
(i) $40,000 paid in April 2011, being the top-up payment for the 2010/11 bonus;
(ii) $70,000 paid in December 2011, being the one month’s salary bonus for 2011/12. Consistent with his
practice in prior years, Sammy authorised the Company to pay this $70,000 into his mandatory provident
fund scheme.
(8)
Sammy’s wife is a housewife. The couple have two children aged 22 and 25. The 22-year-old son was a
full-time student at Polytechnic University until June 2011 when he graduated. He is now working as a staff
accountant. The 25-year-old daughter was a graduate student at The Chinese University of Hong Kong. She
lived in college at the University and was employed part-time by the University as a teaching assistant for a
salary of $10,000 per month.
(9)
Sammy (when he was in Hong Kong) and his family lived with Sammy’s mother (aged 70) in a flat in Shatin.
In September 2011, his mother was suddenly taken ill, and Sammy was then forced to put her in a nursing
home because she needed full-time medical care. His total payments to the nursing home for residential care
amounted to $80,000 for the period to 31 March 2012.
(10) During the year 2011/12, Sammy and his wife made cash donations of $25,000 and $10,000 respectively to
various charities.
All currency amounts are given in Hong Kong dollars.
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Required:
(a) Advise Sammy on the extent to which he is liable to Hong Kong salaries tax for the year of assessment
2011/12.
(7 marks)
(b) Assuming that Sammy is chargeable to salaries tax in full, calculate the salaries tax payable by Sammy for
the year of assessment 2011/12, giving explanations of the treatment you have accorded for tax purposes to
items (3), (5), (6), (7) and (9) above.
Note: You should ignore provisional taxes and overseas tax.
(18 marks)
(25 marks)
5
[P.T.O.
2
Koko Ltd (Koko) is a Hong Kong-incorporated company carrying on business in Hong Kong. Koko is wholly owned by
a Malaysian company which owns huge plantation sites in Malaysia and it imports wood products from its Malaysian
parent and sells them to customers in both Hong Kong and Mainland China. Koko makes up its accounts to
31 March. The following is Koko’s income statement for the year ended 31 March 2012:
Notes
(1)
(2)
$
Profit from securities
Loss from foreign exchange
Dividends from securities
Interest income
Rental income
(3)
(4)
(5)
(6)
(7)
300,000
(430,000)
100,000
12,000
120,000
––––––––
Salaries and wages
Rent and rates
Directors’ fees
Travelling and entertainment expenses
Contributions to mandatory provident fund (MPF) schemes
Donations
Sundry write-offs
Legal and professional fees
Depreciation
Interest expense
(8)
(9)
800,000
350,000
220,000
28,000
24,000
20,000
200,000
134,000
100,000
30,000
––––––––
Turnover
Cost of goods sold
(10)
(11)
(12)
(13)
(14)
(15)
(16)
Net profit
$
3,900,000
(1,800,000)
––––––––––
2,100,000
102,000
––––––––––
2,202,000
(1,906,000)
––––––––––
296,000
––––––––––
––––––––––
Notes:
(1)
Turnover includes the following:
Gross sales of wood products made to Hong Kong customers
Net sales of wood products made to China customers
(gross sales $2,500,000 less relevant import tax $500,000)
Service fee for repackaging the products according to customers’
needs before exporting to China customers
Total
$
1,500,000
2,000,000
400,000
––––––––––
3,900,000
––––––––––
––––––––––
(2)
Cost of goods sold represents the purchase cost of wood products from Koko’s Malaysian parent company.
(3)
This profit arose from the trading of securities by Koko with the surplus funds available. Details are:
Loss from trading on the Hong Kong Stock Exchange
Profit from trading on the China Stock Exchange
(4)
$
(100,000)
400,000
––––––––
300,000
––––––––
––––––––
The loss from foreign exchange comprises:
Loss from trading in Australian dollars
Loss from settlement of purchase amount due to Malaysian parent (HK$ v Ringgit)
Net exchange loss
Koko did not revalue its non-HK$ assets and liabilities at the end of the reporting period.
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$
(210,000)
(220,000)
––––––––
(430,000)
––––––––
––––––––
(5)
The dividends received from securities purchased from the Hong Kong and China Stock Exchange are $35,000
and $65,000 respectively.
(6)
The interest income was received on a loan made by Koko to a director who is resident in Malaysia. The loan
was made by direct money transfer to the director in Malaysia.
(7)
The rental income was received from property located in China and comprised gross rentals of $140,000 less
management fees of $13,000 and an agency fee of $7,000.
(8)
Salaries and wages comprise:
Salaries and bonuses to staff
Wages to a domestic helper of a company director in Hong Kong
(9)
$
750,000
50,000
––––––––
800,000
––––––––
––––––––
The rent and rates comprise $220,000 for the office in Hong Kong and $130,000 for a warehouse in China
to facilitate product delivery to China customers.
(10) Travelling and entertainment expenses of $28,000 represent the cost of trips made by a lawyer to China for
customers’ meetings (the lawyer is appointed by Koko to handle customers’ disputes).
(11) The contributions to MPF schemes represent 6% of the basic salary of all staff.
(12) A donation of $20,000 was made to the Hong Kong Red Cross for China flood disaster.
(13) Sundry write-offs comprise:
Cost of a country club debenture written off due to closure of the club
(the club membership was for the staff’s benefit)
Loan to a member of staff written off on his resignation
Commission charged by the Malaysian parent to an undisclosed agent in China
$
160,000
30,000
10,000
––––––––
200,000
––––––––
––––––––
(14) Legal and professional fees comprise:
$
60,000
40,000
30,000
4,000
––––––––
134,000
––––––––
––––––––
Audit and taxation fee
Tax advisory fee for tax appeals
Legal fee re customers’ dispute in China
Stamp duty on property lease preparation
(15) The total accounting depreciation charge for the year is $100,000, which was calculated based on the book
value of Koko’s fixed assets as at 31 March 2012. During the year, the following additions were made:
Date
10 August 2011
3 December 2011
1 February 2012
2 March 2012
4 March 2012
Particulars
Spent $63,000 to renovate the office, including $13,000 for repainting, $20,000 for
re-carpeting, $10,000 for replacing curtains and $20,000 for a new storeroom.
Bought a photocopier for $20,000 and a computer for $18,000.
Bought a motor car for $400,000.
Paid $5,600 in cash for a fax machine acquired under hire purchase. The balance is
repayable by ten monthly instalments of $2,200 each, starting on 2 March 2012. The
cash price of the machine was $25,600. The machine was delivered to the Hong Kong
office for use on 3 April 2012.
Bought a cutting machine for $55,000, incurring an installation cost of $30,000. The
machine satisfies the environmental control requirement under the Air Pollution Control
Ordinance.
7
[P.T.O.
(16) The interest expense comprises:
Finance charge on the purchase of the fax machine
Interest on loan from Malaysian parent
Interest on bank overdraft and credit line
Finance fee on a bank loan used for acquiring the lease property in China
$
200
11,000
13,800
5,000
–––––––
30,000
–––––––
–––––––
(17) Koko’s tax depreciation schedules show the tax written down values for its 20% and 30% pools are $20,000
and $30,000 respectively.
Required:
(a) Assuming that no offshore claim is made by Koko Ltd, prepare Koko Ltd’s profits tax computation for the
year ended 31 March 2012, showing the net assessable profits/adjusted loss and profits tax payable, if any.
Clearly identify both the year of assessment and the basis period and show all your workings, including the
hire purchase depreciation allowance calculation.
Notes:
(1) You should ignore provisional tax and overseas tax.
(2) No detailed explanations are required.
(25 marks)
(b) Assuming Koko Ltd were to make an offshore claim in respect of the sales made to China customers,
compute the estimated impact on Koko Ltd’s Hong Kong profits tax position for the year ended 31 March
2012, based on your computation in (a) above.
Notes:
(1) No apportionment for indirect expenses is required.
(2) You may make assumptions where appropriate.
(5 marks)
(30 marks)
8
3
Mr Li runs a sole proprietorship business in Hong Kong. During the year ended 31 March 2012, the business made
a profit of $266,000 (before deducting any approved charitable donations). During the year, Mr Li made a donation
in cash to the Hong Kong Community Chest of $150,000.
Mr Li also participates in a partnership in Hong Kong. The partnership incurred a tax loss of $100,000 for 2011/12,
out of which 50% is attributable to Mr Li. Mr Li does not have any tax loss carried forward under the partnership.
On 20 April 2012, Mr Li received a notice from Seafish Ltd, a Hong Kong incorporated company owned by a friend
of Mr Li, advising him that a director’s fee of $120,000 had been declared and approved in the board of directors’
meeting on 22 March 2012. Mr Li has been acting as the director of Seafish Ltd for the last two years but has never
attended any meetings of the company.
Mr Li acquired two office units in June 2011 together with their leases.
The first unit was sold after just two weeks, incurring a loss of $36,000 (before deducting mortgage interest).
In respect of the second unit, Mr Li signed a new lease with the tenant starting on 1 June 2011, at a monthly rental
of $15,000, with an initial premium of $24,000 paid at the time of signing the lease. The lease term is two years.
All the rates and management fees are to be paid by the tenant. Upon the request of the tenant, Mr Li spent $24,000
to repair this unit.
In order to finance the acquisition of the two units, Mr Li obtained a loan from Hong Kong Bank and paid a total of
$150,000 as interest during the year. Out of the total interest, $10,000 was attributed to the first unit that had been
sold. Mr Li has had discussions with the assessor regarding the loss incurred on the sale of the first unit, and it has
been agreed that the loss can be claimed.
Mrs Li is a teacher with an annual salary of $330,000. During the year ended 31 March 2012, she made a donation
of $50,000 to Po Leung Kuk in cash. Mrs Li participates in a partnership with her sister, on a 50:50 basis, to run a
fashion boutique. For the two years ended 31 March 2011 and 2012, the partnership had the following results:
Year ended 31 March 2011
Year ended 31 March 2012
Allowable loss
Assessable profits
$220,000
$200,000
Mr and Mrs Li elected for personal assessment for the year of assessment 2011/12, but not for the year of assessment
2010/11. The couple currently live in a leased property with a rental payment of $40,000 per month. They have two
children, aged 23 and 17, both studying full-time in Hong Kong. Throughout the year, Mr Li paid $2,000 per month
towards the maintenance of his mother (aged 70), who is an ordinary resident of Hong Kong.
Required:
(a) Compute the tax payable by Mr and Mrs Li under personal assessment for the year of assessment 2011/12.
(16 marks)
(b) Explain the tax treatment of Mrs Li’s share of the partnership loss for the year of assessment 2010/11.
(4 marks)
(20 marks)
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[P.T.O.
4
Milan Ltd (the Company) is engaged in the trading of second-hand handbags in Hong Kong. The Company
commenced business on 1 January 2012. Since commencement, the Company has not finalised any audited
accounts, filed a profits tax return, nor exchanged any correspondence with the Inland Revenue Department.
Management accounts have been prepared for the period 1 January 2012 to 31 October 2012, which show a net
profit of $200,000.
The Company is considering closing its accounts either on (1) 31 October 2012, or (2) 31 March 2012 and has
come to you for advice.
Required:
(a) Determine the basis periods, where relevant, for the years of assessment 2011/12 and 2012/13 for Milan
Ltd, assuming that the company’s first accounts are to be closed on (1) 31 October 2012, and (2) 31 March
2012.
(4 marks)
(b) Advise on the compliance obligations of Milan Ltd under the Inland Revenue Ordinance in respect of:
(i)
the company’s own liability to tax, including, where relevant, the due dates for compliance purposes,
assuming that the company’s first accounts are to be closed on (1) 31 October 2012, and (2) 31 March
2012; and
(7 marks)
(ii) the company’s liability in its capacity as an employer.
(4 marks)
(15 marks)
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5
David is employed by Star Ltd, a Hong Kong company. On 1 September 2011, David was granted the right to
subscribe for 2,000 shares in Moon (Holdings) Ltd, the UK parent company of Star Ltd, at the price of $20 for each
share. On that date the shares were worth $24 each. David did not have to pay for this option. The option could be
exercised at any time prior to 31 March 2012. David exercised the option on 1 March 2012, when the shares were
worth $28 each. He sold the shares on 31 March 2012 at their then market price of $30 each.
When David was completing his Tax Return – Individuals for 2011/12, he wondered whether he should report in that
return details of the share option income. He approached his friend, Danny, who had just completed his professional
accountancy examinations. Danny told him that he did not have to disclose any such details in his return because
the option scheme related to the shares of an offshore company and this company was not his employer. Danny also
said that if his advice was wrong, David should not worry because (1) the Inland Revenue Department would not
assess any penalty tax if the taxpayer has doubts about the taxability of the income; and (2) no penalty tax could be
assessed because David had acted upon professional advice (Danny’s advice) and David therefore had a ‘reasonable
excuse’ for failing to complete a proper return.
Required:
(a) Advise David, in detail, of the Hong Kong tax consequences of his share option benefit, quantifying any
taxable amount(s) arising.
(4 marks)
(b) Comment on Danny’s advice and explain, giving reasons, what David should do now.
(6 marks)
(10 marks)
End of Question Paper
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